South Korea plays a major role in the “economic emergence” of the Philippines, which is now moving to an even higher growth plane as the Duterte administration fast-tracks its ambitious $170-billion “Build, Build, Build” program, Finance Secretary Carlos Dominguez III said.
Speaking before leaders of South Korea’s business sector, Dominguez said prudent fiscal management, a manageable debt service load and more robust revenues are expected to improve the sovereign credit ratings and further enhance its capability to finance over the medium term its economic strategy anchored on an aggressive infrastructure program.
Dominguez said South Korea’s role in the Philippines’ rapid growth is best demonstrated by its funding support for two key “Build, Build, Build” projects—the Panguil Bay Bridge in northern Mindanao and a new International Container Port in Cebu, which are both scheduled to begin this year and due for completion by 2020.
South Korea is also the Philippines’ sixth largest source of official development assistance (ODA), with loans and grants amounting to $570.6 million as of December 2017; a top source of tourists for the past three years; and the country’s fifth major trading partner, Dominguez said.
In 2017, 1.6 million Koreans visited the Philippines, representing a quarter of total foreign tourist arrivals and an increase of 9 percent over the previous year. Total bilateral trade with South Korea in 2017 amounted to $10.61 billion.
“We have long admired South Korea’s sterling achievement in economic development. We know that there are many complementarities between our two economies. We are confident our trade and investment relationship can grow more robust in the coming period,” Dominguez said during the Korea Business Forum held at the Lotte Hotel here.
Dominguez said the Duterte administration’s economic strategy of investing heavily in infrastructure and implementing tax reform to support this aggressive spending program while making the tax system simpler, fairer and more efficient for both individuals and businesses was similar to what Korea had done in a period of over three decades to sustain its high growth trajectory.
“I am sure you in Korea are very familiar with this type of economic growth because this was what you did in the 70’s and 80’s — you invested a lot of money in your own infrastructure, and that’s why you are where you are today,” Dominguez said.
As for tax reform, “all of these were done by South Korea, again, in the 70s, 80s and 90s,” Dominguez said.
To expand trade and investment relations with South Korea and other countries, Dominguez said the Philippines is committed to improving the ease of doing business, respect the sanctity of contracts, and promote a more conducive climate for investments.
Dominguez said the tight spreads of the Philippines’ bond issuances indicate confidence in the sound fiscal and debt management of the Duterte administration as he recalled that when the government issued 10-year dollar denominated bonds in January, its spread was 37.8 basis points (bps) over the US Treasuries, while its maiden “Panda” bond float last March had an even tighter spread of only 35 bps over the benchmark.
The tight spread of 37.8 bps of the dollar-denominated bonds was better than the 67 bps spread in 2017 and the 103 bps in the last year of the Aquino administration, Dominguez noted.
“We are also planning to issue ‘Samurai’ bonds this year,” Dominguez said. “We are now in the process of evaluating the right bond structure and studying the execution procedure and documentary requirements needed for the issuance.”
Further underlining the strong investor confidence in the Philippine economy was the impressive net inflow of $1.5 billion in foreign direct investments (FDIs) in the first two months of 2018, which surpassed the figure recorded for the same period last year by 52.6 percent.
Dominguez said the higher volume of FDIs supports the Duterte administration’s efforts to shift the economy to investments-led growth so as to provide meaningful employment to its young, skilled workforce, which would emerge as “our economy’s comparative advantage into the long future.”
The government is also revisiting its Foreign Investments Negative List (FINL) to open more areas for joint ventures and direct investments, reviewing its procedures to reduce red tape and shorten approval time for business start-ups, and exploring possibilities for expanded e-governance using digital technologies, Dominguez said.
Dominguez also informed Korean investors that just a couple of weeks ago, President Duterte signed the Ease of Doing Business Law, which creates a unified business application form and a central business portal to make it easier to open or renew businesses, and mandates a zero-contact policy to reduce official corruption.
President Duterte has also made the country a safer place for investors, with high campaign against corruption and criminality leading to a decrease in crime volume by 21.86 percent since the start of his administration, Dominguez said.
“The President believes a more law-abiding society is indispensable to achieving economic growth,” he added.
Dominguez also painted a general picture of the Philippines’ economic emergence by underscoring the economy’s sustained rapid expansion of 6.5 percent or better for the last 10 quarters; the significant growth of the manufacturing, industry and construction sectors; the government’s plan to increase infrastructure investments from 6.3 percent of the gross domestic product (GDP) in 2018 to 7.3 percent by 2022 through its 75 high-impact and big-ticket projects.
He said the first package of the comprehensive tax reform program—the Tax Reform for Acceleration and Inclusion (TRAIN) law—has contributed to strengthening the Filipinos’ purchasing power as well as immensely improving the country’s tax effort to 14.3 percent of GDP in the first quarter.
“The impressive increase in revenues, particularly on tax collections by the revenue agencies for the first four months of 2018 is a result of the effective implementation of the tax reform law, and this enabled the government to sustain its aggressive spending policy without breaching the programmed budget deficit,” Dominguez said of the Tax Reform for Acceleration and Inclusion (TRAIN) Act.
Dominguez said a second tax reform package on reducing the corporate income tax while modernizing investment incentives is meant to empower micro, small and medium enterprises (MSMEs) and enable them to take full advantage of the benefits of the “Build, Build, Build program.
“In order to be able to achieve this, we would like to appeal to the companies that have been receiving an equivalent of P300 billion a year in tax credits to share part of their benefits with the small and medium enterprises, which incidentally hire more than 90 percent of all our workers in the country. They are our target to help in the second round,” Dominguez told the businessmen gathered at the forum.
Alongside these positive developments, however, is an elevated inflation rate, which is typical of a high-growth economy like the Philippines, but was aggravated by the sharp rise in global oil prices and the adjustments in the peso-dollar exchange rate, Dominguez said.
“Economists assure us that the inflation rate is manageable and that it should begin deescalating towards the second half of this year. We do not expect the elevated inflation rate to become permanent,” he added.